Free Cash Flow

Definition

Free cash flow is the amount of cash generated by a business that is available for distribution among its security holders. Security holders include debt holders, equity holders, preferred stock holders, and convertible security holders. Specifically, free cash flow is used to pay dividends, make acquisitions, develop new products, invest in new property, plant and equipment, pay interest expenses, and reduce debt.

According to many investors, free cash flow is the best indication of a company's ability to generate cash.

This is a good approximation that fails to take into account the value of debt tax shields. Also, for companies which report interest paid on debt in the Operating Activities section of the Cash Flows statement, YCharts Free Cash Flow = Standard Free Cash Flow - Interest Expense Paid on Debt